The world’s third largest spirits maker by volume, United Spirits Ltd, has acquired Balaji Distilleries Ltd, ending speculation circulating in the market for almost four years.

In early 2005, news reports suggested that the UB Group was close to buying the breweries division of Balaji, while in late 2007, reports suggested the group would pick up a 35% stake in the company. Balaji Distilleries has been a contract manufacturing unit for the group since its inception in 1983.

The deal has been structured in a way that Balaji will be merged into United Spirits for a share swap in the ratio of 2:55. Based on the market price of the two companies’ shares, it seems the deal is favourable to shareholders of Balaji Distilleries.

On Friday, before the deal was announced, United Spirits’ shares traded at Rs846, while Balaji Distilleries quoted at Rs26.50. Based on market prices, the swap ratio could have been 2:64.

A month ago, when United Spirits’ shares traded at around Rs925, those of Balaji were valued much cheaper at Rs16.50. Based on those valuations, the swap ratio could even have been 1:55, resulting in a much lower dilution in United Spirits’ equity base after the merger.

(The manner in which Balaji’s shares have risen in the past few weeks, right before the deal was announced, is perhaps worthy of a Sebi investigation.)

But even with the current ratio, the dilution will be low. Balaji has an equity base of 53 million shares, and based on the swap ratio, there will be an addition of a mere 1.93 million shares to United Spirits’ equity base of at least 100 million shares, a dilution of less than 2%.

Late last year, Balaji had issued 90 million convertible warrants, each of which can be converted into one equity share at a price of Rs13.78. Given Balaji’s current share price of Rs25, the warrants are likely to be converted, in which case the dilution will be higher at 5.2%.

What do United Spirits’ shareholders get in exchange? Balaji’s revenues last year of Rs534 crore would add about 14% to its revenues. But the contract manufacturing firm’s profit before exceptional items and tax stood at just Rs5 crore, just 1% of United Spirits’ profit before tax of Rs500 crore. But Balaji paid royalty of Rs50 crore, which now needn’t be paid. Adjusted for this, its profit shoots up to Rs55 crore, which will add at least 10% to the consolidated profits.

On the flip side, Balaji Distilleries has been a sick company for the past two years, and may carry some baggage into the merged entity.